The decisive court victory of Jensal Software Ltd. against HMRC shows that the CEST tool cannot be used as a litmus test for IR35 tax status determination. The main factor that contributed to the decision going against the tax agency was the test of Mutuality of Obligation (MOO).
MOO is an important factor when deciding whether an independent contractor offers services similar to a regular employee. This is the main factor that determines off-payroll or IR35 status of a locum contractor. However, this same factor is omitted when determining tax status using the HMRC’s CEST tool.
A surprising revelation from a webinar in which representatives of NHSI, NHS Trusts, and HMRC were present was that the MOO test was omitted from the CEST tool. This was due to the erroneous assumption that MOO is present in all agreements with contractors.
The latest court case against HMRC highlights the faulty reasoning in using the CEST test. According to Jolyon Maugham, the Director of The Good Law Project, this will raise the question whether actions of the UK public companies such the NHS and BBC in categorizing independent contractors as regular employees were lawful.
Impact of the Court Decision on Locum Contractors
The recent court findings suggest that CEST tool is not suitable and cannot be used of determining IR35 tax status. Without taking consideration of MOO, a contractor cannot be classified as an employee.
MOO must be considered by public companies such as NGS Trusts when making a decision regarding the tax status of a locum. The ruling of the recent court case signifies that the HMRC cannot encourage the use of CEST tool for tax determination.
Whether an independent contractor offers services as an employee depends on the obligation of the worker to offer services to the company and the corresponding responsibility of the company to accept work.
However, only a few locum contracts have a significant degree of MOO and the omission of this in the CEST tool to determine IR35 status is a clear mistake by the HMRC. Without this critical factor, an independent contractor cannot be said to be a permanent employee and therefore should not be taxed.
The HMRC has deliberately omitted MOO in assessing IR35 tax status. And this fact has been highlighted in the recent court victory of the IT company. It has shown that HMRC’s CEST tool is not credible is assessing IR35 status. As a result, there is a high likelihood that it will change the tax status of many locum contractors thereby reducing the tax obligations.